Diverse East Mediterranean outlook
Egypt will enjoy a gas boom, while Cyprus and Israel struggle to find export markets
During 2017, Egypt adopted an energy sector reform programme, including the liberalisation of the gas industry, and subsidy reductions. These reforms have already benefited the energy sector. Gas production increased, with the giant Zohr gasfield (reserves of 0.85 trillion cubic metres) due on stream in December, helping reduce liquefied natural gas imports by 30%. The first phase of Zohr will be completed during the first half of 2018, adding over 10bn cm a year to the Egyptian gas grid, rising to about 28bn cm/y by 2019. With smaller gasfields also being developed over the same period, Egypt expects to become self-sufficient in gas by the end of 2018, allowing it to phase out LNG imports and resume exports in the early 2020s. This is good news for the Egyptian economy, but bad news for Israel and Cyprus, with both hoping to export gas to Egypt.
These developments will make 2018 an even better year than last for Egypt's energy sector. Increasing investments, attracted by the reforms and high gas prices, will lead to increased exploration and production activity and more discoveries. In the coming months, tenders will be issued for new concessions in Egypt's western Mediterranean waters.
The greatest challenge in 2018 will be to implement fully the liberalisation of Egypt's gas industry, with the potential of creating a freer, more flexible and more efficient market. This should support Egypt's aspirations to become the East Med's energy hub and help attract more investment in a sector that is crucial to the country's economy.
In contrast, Israel's sole success in 2017 was to achieve a final investment decision (FID) for Phase 1A of the giant offshore Leviathan gasfield, with a production start-up target of end-2019. But the agreement with the Jordanian National Electric Power Company, to supply 3bn cm/y of gas over 15 years, is still subject to political risks, with strong parliamentary and public resistance to the deal in Jordan. In addition, some of the secured gas sales agreements to independent power projects in Israel are still to be realised.
Phase 2 of Leviathan depends on securing firm gas-sales deals for exports to Turkey, Egypt and Europe. All these projects face major political and commercial problems. Although a gas pipeline framework deal will likely be signed with Turkey, progress on the project is unlikely in 2018. For commercial reasons, too, there's little hope of movement on the proposed EastMed gas pipeline—designed to transport East Med gas to Europe—despite framework agreements signed by Israel, Cyprus, Greece and Italy, with support from the European Commission.
However, with low prices undercutting Leviathan gas, the development of Tanin and Karish gasfields by Greece's Energean should achieve FID and proceed successfully to construction in 2018.
Lebanon's first offshore licensing round produced results with a consortium of Eni, Total and Novatek bidding for blocks 4 and 9. The challenge in 2018 will be the promising block 9, which includes an area disputed by Israel.
Cyprus's third offshore round was concluded successfully early in 2017, with three blocks awarded to Eni, ExxonMobil and Total. But that was the only success in 2017. Total's first well in Block 11 turned out to be a dud, and the Aphrodite gasfield, discovered in 2011, is still looking for buyers for its gas.
Still, better news may arrive in 2018. Based on promising results from the assessment of seismic data, drilling planned by Eni, in Blocks 6 and 8, and ExxonMobil in Block 10, may come up trumps in the coming months. By the end of 2018, Cyprus should know what quantities of gas lie in its licensed blocks. But it won't all be plain sailing. Turkey will continue harassment of drilling activities and may increase tension by drilling in Cyprus's economic exclusion zone.
But finding gas in the East Med is proving easier than selling it. Exporting outside the region is still challenged by persistently low global gas prices, which are expected to stay low for the longer term. The future for East Med gas exports may be through integrated projects, to minimise costs, and LNG. And even then, headwinds will blow.
Charles Ellinas is an energy consultant
This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here